Any employer who has faced potential class-action wage-and-hour lawsuits knows what a headache they can be. Due to a recent court ruling, employers have a lot more to worry about. That case, Pippins v. KPMG, has caused tremendous turmoil and confusion among those who follow employment litigation and electronic discovery.

The case is unusual because a judge ordered the defendant, accounting giant KPMG, to preserve a huge number of hard drives while the litigation is ongoing. According to some observers, the financial and logistical costs of simply maintaining all that information will be so expensive that the defendant may need to settle.

The National Chamber Litigation Center, the public policy law firm of the U.S. Chamber of Commerce, is one of the groups that weighed in against the court ruling. According to the NCLC, in a “friend of the court” brief, it “urged the U.S. District Court for the Southern District of New York to set aside a magistrate judge’s unprecedented order requiring a defendant in a putative class action to rip out and retain every single hard drive from every computer that any member of the putative class or collective may have used before leaving the company.”

The NCLC’s brief warned, “… if the magistrate judge’s order is not overturned, the threat of costly preservation and discovery of electronically stored information will give plaintiffs even greater leverage to coerce settlements of even the most frivolous claims.”

As the case continues through the courts, employers need to understand the legal implications of the ruling, how they manage their own data backup policies and how this could encourage employees and former employees to be even more aggressive about filing lawsuits.

What to Know About Legal Discovery

The significant issues in the case revolve around “discovery,” the part of litigation when lawyers from both sides gather information that could be relevant to the lawsuit. While it may seem like the lawyers are the ones who should worry about discovery, employers need to know how workplace technology, the organization’s records retention policy, and employees’ behavior can affect a lawsuit.

As new technologies proliferate and companies generate more and different types of files, discovery has become an increasingly expensive and time-consuming aspect of litigation. According to some estimates, discovery costs account from anywhere between 50 percent to 90 percent of the total costs of lawsuits. And, the amount of data that companies generate will continue to skyrocket. According to the Gartner Group, the amount of enterprise data will grow by an estimated 650 percent by 2015.

Generally speaking, anything that may be “potentially relevant” in a business-related lawsuit is discoverable, unless it is protected by attorney-client privilege. Typically, both sides try to minimize the amount of data they need to turn over, while trying to get as much information as possible from the other side. In today’s litigation environment, attorneys are often more interested in bogging the other side down with the cost and stress of wading through massive amounts of information than in the information itself. Attorneys can spend a great deal of time wrangling over what information should be turned over, in what format and in what timeframe. When the two sides can’t agree, the judge may step in and decide.

The Background on the Case

The production of discovery lies at the heart of the issues in Pippins v. KPMG. In that case, the plaintiffs, two former auditors, sued KPMG in 2011, claiming the company violated the Fair Labor Standards Act (FLSA) and New York State labor law when it failed to properly pay them overtime. The claims of violating New York State law were filed as a putative class action, and the FLSA suit was filed as a collective action, which is similar to a class action except plaintiffs need to opt in to the lawsuit. The case involves more than 7,500 potential plaintiffs for the FLSA claims and more than 1,500 for the New York State labor claims.

As the case moved forward, the parties began to discuss discovery, including such issues as electronically stored information (ESI) and proper preservation of data. As part of the lawsuit, KPMG had preserved information that included time records of the hours the plaintiffs worked, and payroll records indicating how much they were paid.

In August, unable to reach an agreement with the plaintiffs over discovery issues, KPMG filed a protective order with the court asking that it only be required to preserve 100 hard drives, or alternatively, to shift the cost of preserving additional hard drives to the plaintiffs.

In his response to the protective order, Magistrate Judge James L. Cott of the Southern District of New York ruled that KPMG had to preserve the hard drives of thousands of former employees who could be part of the case. The case has been appealed to the U.S. District Court for the Southern District of New York.

The ruling is a departure because the class has not been certified. Until this decision, employers were not expected to preserve hard drives for former employees simply because they might someday be members of a class. The requirement to preserve the hard drive of each of 7,500 potential class members is causing raised eyebrows here. In order to preserve and produce all the ESI the plaintiffs are demanding, KPMG estimates it would have to spend $100 million.

What to Do Now

Employment litigation, particularly class- and collective-action cases, presents many challenges for companies. The amount of data that can potentially be involved, how many class members could exist and how far plaintiffs’ lawyers can go if they are willing to manipulate the adversarial and discovery aspects of the legal system can make these types of cases difficult to manage. In order to best position themselves for discovery and lawsuits, employers can take several steps to manage their records before any lawsuit is ever filed.

• Review the company’s records management plan. According to the Sedona Conference, a non-profit think tank, “An organization should have reasonable policies and procedures for managing its information and records.” Organizations should also develop procedures that address how information and records are created, identified, retained, retrieved and disposed, according to the Sedona Conference.

If your organization doesn’t have a formal records retention and management program, or if you haven’t updated it recently, now is the time to do so. A records retention and management policy doesn’t mean that you save every piece of data and information all of your employees create. That approach will quickly lead to staggering storage needs and more data than you could hope to wade through during a lawsuit. Be sure that your policy includes a schedule for destroying data, as well as preserving it.

In order to stand up to a judge’s review and the attacks of a plaintiffs’ attorney, your policy needs to be consistent and appropriate for your company and industry. The review and update should be a team effort, involving outside counsel, in-house attorneys, records management experts and the IT staff. Remember that industry standards and state and federal regulations may dictate some of the aspects of your policy.

Be sure to get the participation of every stakeholder group, so that your plan will be realistic, strategic and comprehensive. Once the plan is updated, it should also be periodically reviewed as new hardware is deployed and software is updated.

• Train and monitor compliance. An automatic retention and destruction policy can work like clockwork for information stored on the company’s servers. However, employees may store files on their hard drives and save every e-mail they have ever received on their company-issued smart phones. It’s important that you train employees on the policy, and then monitor compliance. Periodic audits can be very helpful to ensure that employees are complying with policies, particularly for their laptops, smart phones and other hardware systems that may not be part of the company’s central servers.

• Don’t forget former employees. Your records retention policies should not only include current employees, but those who have left or are in the process of leaving. You should consult with legal counsel to understand the federal and state regulations and legal precedents that could dictate how long you should retain records for these people.

For example, under FLSA, employers must preserve payroll records, collective bargaining agreements, sales and purchase records for at least three years. Records on which wage computations are based, such as time cards and piece work tickets, work and time schedules and records of additions or deductions to wages, should be kept for two years. Identify the data you need to keep and what you can destroy, and follow that policy consistently for current, former and departing employees.

 Regardless of whether the current ruling in Pippins v. KPMG is overturned, plaintiffs’ lawyers will be considering ways to ratchet up the discovery costs and burdens. By understanding how discovery works and what companies and employees need to do, employers can position themselves more strategically before and during litigation.